Banks Cannot be held Guilty of Wilful Contempt Merely for Non-Release of Rolled-Over Non-Fund Based Credit Facilities under Approved Resolution Plan: NCLAT [Read Order]

The National Company Law Appellate Tribunal (NCLAT) has held that lender banks cannot be held guilty of wilful contempt merely because rolled-over non-fund based credit facilities were not released under an approved resolution plan particularly where the dispute involves interpretation of contractual obligations and banking requirements.

The ruling came in appeals filed by a consortium of lenders including State Bank of India, Bank of India, Canara Bank, ICICI Bank, Indian Bank and Union Bank of India, challenging an order of the National Company Law Tribunal (NCLT) Mumbai Bench which had held the banks in contempt and directed release of rolled-over facilities, failing which one day of civil imprisonment would follow.

Jyoti Structures Ltd. which had undergone Corporate Insolvency Resolution Process (CIRP) had secured approval of a resolution plan in 2019. The plan contemplated roll-over of existing non-fund based facilities such as bank guarantees and letters of credit. After the Closing Date was achieved in November 2021 following infusion of ₹170 crore by investors, disputes arose regarding the conditions under which the facilities were to be released.

The lenders argued that the approved resolution plan as well as the Non-Fund Based Facility Agreement entitled them to undertake project-specific appraisal and comply with applicable banking regulations before issuance of guarantees and letters of credit. They contended that issuance of fresh sanction letters containing banking safeguards could not amount to disobedience of judicial directions.

The corporate debtor and its shareholders stated that the lenders were under a binding obligation to release the facilities immediately and that the fresh sanction letters were designed to frustrate implementation of the resolution plan.

The Appellate Tribunal observed that contempt jurisdiction can be invoked only when there is clear, deliberate and wilful disobedience of a court order. The Tribunal noted that several conditions incorporated in the sanction letters had been found bona fide and arose from the lenders concerns regarding regulatory compliance, project appraisal and protection of public funds.

The Bench comprising Justice Ashok Bhushan (Chairperson) Mr. Barun Mitra (Member Technical) and Mr. Arun Baroka (Member Technical) held that where an order is capable of more than one reasonable interpretation, contempt proceedings are not maintainable.

Accordingly the Tribunal concluded that mere non-release of rolled-over non-fund based credit facilities could not automatically justify a finding of contempt.

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